Some advisors work hard to properly allocate the assets of high-net-worth clients, only to find that an underinsured loss destroys considerable wealth.
“If they don’t have enough insurance at the time of the loss, it’s going to eat up what they’ve placed in their portfolios,” says Diane Borden, head of the private client group at San Francisco-based insurance brokerage firm Woodruff-Sawyer & Company. Borden frequently works with financial planners.
Gregory Olsen, a planner and partner at New York-based Lenox Advisors, also sees danger from inadequate insurance. “Often we find that they don’t have enough umbrella liability coverage,” he says. Olsen says that some ultra-high-net-worth people may only have $3 million or $5 million in umbrella coverage. And, he notes, people in that wealth bracket have “much different insurance needs than your average middle-income American.”
As a result, the insurance industry has developed special products for wealthy families. “They are different from the mass-market insurance programs that are available,” says Borden. With mass-market umbrella liability insurance, for example, any legal defense costs deplete the coverage. In private-client insurance programs, says Borden, “all your defense costs are paid by the company.”
All homeowners policies have limitations on jewelry. Even middle-income families need to be sure that rings, watches and such are covered by a rider. If jewelry is lost, rather than stolen, the mass-market policy holder is out of luck, but the private-client policy holder would be covered, says Borden.
Some possessions should be handled outside the typical property-casualty coverage carried by HNW individuals. Olsen cites antique cars as an example of a category that requires specific expertise. Companies that specialize in insuring them, he says, “are very good at it because they understand the marketplace.”
How much umbrella liability coverage is enough? The upper limit of available policies is $100 million. “Most individuals are not going to be sued for more than $100 million,” says Olsen, who notes that the plaintiff must demonstrate loss in the amount being sued for.
“It’s never black and white,” says Borden, who observes that lawyers will often target the defendant with the deepest pockets.
When assessing risk, Borden considers the clients’ lifestyles, net worth, properties, and travel habits. But in the end, the amount of coverage is up to the client. “You want to provide them a limit where they can sleep at night and feel protected,” she says.